Additional Guidance on Enhanced ESG Disclosures in Hong Kong Capital Markets | Seyfarth Shaw LLP


Investors and asset managers continue to emphasize environmental, social and governance issues (“ESG”) as drivers of financial value in their investment products.

In accordance with other international regulatory and standards bodies, such as the US Securities and Exchange Committee and the International Sustainability Standards Board (see our company article here), Hong Kong regulators will introduce a “mandatory” working group on climate-related financial disclosures (“TCFD”) – aligning climate-related disclosures in relevant sectors by 2025 as part of a five-point sustainable finance strategy previously announced by the Inter-Agency Steering Group on Green and Sustainable Finance. Hong Kong’s financial markets are largely regulated by the Hong Kong Securities and Futures Commission (“SFC“) and The Stock Exchange of Hong Kong Limited (the “HKEX”).

Spearheading developments on this front, the SFC published a revised circular in June 2021 (the “Flyer 2021“), replacing the previous version of 2019, on the requirements applicable to mutual funds and mutual funds authorized by the SFC which integrate ESG factors as their main investment objective and reflect them in the objective and/or the investment strategy (“ESG funds”), effective January 1, 2022.

The HKEX has also directed its listed issuers to the TCFD in its new ESG reporting guide. Effective July 2020, the Exchange’s ESG Reporting Guide was amended to incorporate elements of the TCFD’s recommendations, such as the requirement for board oversight of ESG matters, targets for certain environmental KPIs and the disclosure of the impact of significant climate-related issues.

SFC Initiatives—the 2021 flyer

The new guidelines in the 2021 circular set out implications for ESG funds, some of which are described below.

Disclosure in Offering Documents

Under Article 6.1 of the Code of Mutual Funds and Mutual Funds, offering documents must provide the information necessary to enable investors to make an informed judgment about the investment.

Disclosure of Additional Information

The 2021 Circular also requires ESG Funds to disclose additional information, including how the ESG focus is measured and monitored throughout the life cycle of the ESG Fund, methodologies adopted, engagement policies (if any ), description of sources and processing of ESG data, or applicable assumptions.

Period evaluation

The 2021 circular now requires ESG funds to carry out at least one annual assessment to demonstrate how they have achieved their ESG objectives. These disclosures must be made periodically through appropriate means (i.e. annual reports), including:

  • a description of how the ESG Fund achieved its ESG objective over the assessment period;
  • a description of the basis of the valuation made, including any estimates and limitations; and
  • where the ESG Fund has provided a previous periodic assessment, a comparison between the current assessment period and at least the previous assessment period.

Impact on Undertakings for Collective Investment in Transferable Securities (“UCITS”) Fund

Of the more than 100 ESG funds authorized by the SFC, seven of these funds are domiciled in Hong Kong, while the rest are EU-domiciled funds marketed in EU markets as UCITS[1]. The SFC has adopted a simplified approach to the authorization of UCITS funds from specific jurisdictions.

After considering European regulations on sustainability disclosures in the financial services sectors (“SFDR”), SFC has recognized UCITS funds as ESG funds if they incorporate ESG factors as their primary investment objective and reflect this objective in their investment objective or strategy (“ESG UCITS funds”). ESG UCITS funds that meet the fund disclosure and reporting requirements under the SFDR will be deemed to have generally complied in substance with the disclosure requirements under the 2021 Circular.

Ongoing Monitoring Requirements and Consequences of Non-Compliance

An ESG fund will be removed from the SFC’s authorized list on its dedicated ESG funds webpage if it is no longer able to meet the requirements of the 2021 Circular.

Fund managers should also note that in addition to removing the fund from the SFC’s ESG fund list, the SFC may take appropriate regulatory action against the fund manager for funds that violate the 2021 Circular.

The HKEX ESG Reporting Guide

The HKEX first introduced the ESG reporting guide in 2012 for voluntary disclosure of ESG information. Following revisions in 2016 following market consultation, the HKEX adopted improvements to the then-existing ESG reporting regime in December 2019 (“ESG Guide”), which came into force in July 2020. The ESG Guide, which is an appendix to the listing rules of the Hong Kong Stock Exchange, provides a framework for listed issuers to, among other things, identify and consider environmental risks and social risks can be important for them. Under the ESG Guide:

  • the board of a listed issuer is responsible for the effective governance and oversight of ESG matters, as well as the assessment and management of material environmental and social risks; and
  • a listed issuer is required to disclose environmental and social matters in its ESG report in accordance with the ESG Guide.

The ESG report must be published on an annual basis and covers the same period as the listed issuer’s annual report. It could be published as part of an annual report or in a separate report. Regardless of the format adopted, the ESG report must be published on the stock exchange’s website and on the issuer’s website.

For ESG reporting relating to the 2021 financial year, an issuer must publish its ESG report within five months of the end of the financial year. For the fiscal year beginning on or after January 1, 2022, an issuer is required to publish its ESG report at the same time as the publication of its annual report.[2] In addition, the Hong Kong Corporate Governance Code has recently been revised[3] to clarify that “risks” for the purposes of assessment and determination by an issuer’s board of directors would include ESG risk and that the board’s annual review of risk management and internal control should therefore cover also ESG risk.[4]

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[1] According to the list of ESG funds authorized by the SFC in March 2022:

[2] Rule 13.91(d) of the Hong Kong Listing Rules

[3] The revised corporate governance report has been in effect since January 1, 2022

[4] D.2 Principle of the Hong Kong Code of Corporate Governance